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FINANCIAL INNOVATION: GROWTH AND NEW PRODUCTS

DERECHO & ECONOMÍA. FINANCIAL INNOVATION: GROWTH AND NEW PRODUCTS. DERIVATIVES AND RISK MANAGEMENT IN MEXICO. Dr. HERNÁN SABAU MAY 2001. Innovations in different markets. DERECHO & ECONOMÍA. Fixed income securities Interest rate Foreign exchange Currencies Equity

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FINANCIAL INNOVATION: GROWTH AND NEW PRODUCTS

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  1. DERECHO & ECONOMÍA FINANCIAL INNOVATION: GROWTH AND NEW PRODUCTS DERIVATIVES AND RISK MANAGEMENT IN MEXICO Dr. HERNÁN SABAU MAY 2001

  2. Innovations in different markets DERECHO & ECONOMÍA • Fixed income securities • Interest rate • Foreign exchange • Currencies • Equity • Indices and individual stocks • Credit • Default risk

  3. The Mexican Derivatives Market: past innovations in different markets DERECHO & ECONOMÍA • Fixed income • Petrobonos (1977) • OTC Senior / Junior structures (1993) • FX • Coberturas cambiarias (1987) • Equity • Warrants market (1992) • IPC, guaranteed returns, american call spreads • OTC issues • Nafta warrant (1993) • MexDer • Futures on individual stocks (1999) • Credit (?)

  4. The Mexican Derivatives Market has not grown to a mature market DERECHO & ECONOMÍA • Trading Volume has grown very slowly • Underlying markets: depth and liquidity • 1994 / 1995 crisis: effects on credit and the financial system • Regulatory issues • Excess controls through early and mid 90’s • Capital requirements after crisis • Risk management • Tax implications • Risk culture

  5. The Mexican Derivatives Market: recent developments favoring innovation in the Fixed income and FX markets DERECHO & ECONOMÍA • Up to 1999 longest rate was for 91 days • Development of a long term interest curve: • Decreasing inflation and stability • Bank disintermediation: increasing market share of Government debt • Introduction of M2 – M5 bonds: fixed income 2-5 year bonds with fixed rate • Institutional investors: Afores, Life Annuities, Insurance Companies

  6. 120% 50% 45% 100% 40% 80% 35% 60% 30% 40% 25% 20% 20% 15% 0% 10% -20% 5% -40% 0% 98 A J O 99 A J O 00 A J O 98 A J O 99 A J O 00 A J O Checking accounts + current deposits Checking accounts + current deposits Restof bank securities deposits Rest of bank securities deposits Government securities- held by residents Government securities-held by residents Private securities- held by residents Private securities- held by residents Recent developments favoring derivatives innovation: bank disintermediation DERECHO & ECONOMÍA Market Share Annual Real Growth

  7. Government Securities Structure (Thousand dollars) Recent developments favoring derivatives innovation: Government debt with fixed rates and 2 to 5 years maturity DERECHO & ECONOMÍA

  8. Recent developments favoring derivatives innovation: Institutional Investors DERECHO & ECONOMÍA Siefores All figures in million dollars Mutual Funds Insurance Companies and Life Annuities (Reserves)

  9. Recent developments favoring derivatives innovation: 5 year interest rate curve DERECHO & ECONOMÍA

  10. Recent developments favoring derivatives innovation: 5 year interest rate curve DERECHO & ECONOMÍA

  11. The Mexican Derivatives Market: recent developments favoring innovation in the Fixed income and FX markets DERECHO & ECONOMÍA • Development of more depth and liquid markets • Deregulation: • easier access to markets • Capital requirements and risk control • Market makers • Since october 2000, 5 institutions • Only Fixed rate Government securities • More competitive picture in equity trading • Opening of listed futures market and clearing corporation

  12. Fixed Rate Securities CETES 17.77% BONO M3 139.55% BONO M5 2.03% Floating Rate Securities BONDE 28 0.42% BONDE 91 0.56% BONDES 182 0.95% BONDES T 0.000% Inflation Link Securities UDIBONOS 3 0.002% UDIBONOS 5 0.003% UDIBONOS 10 0.000% IPAB Securities IPAB 0.002% Central Bank BREMS 0.002% Recent developments favoring derivatives innovation: more liquidity DERECHO & ECONOMÍA Liquidity (Daily turn over/outstanding)

  13. Vafin 3% Vector 9% Merril Lynch 9% Bancomer 4% Goldman Sachs 5% Santander 9% Inverlat 7% GBM 8% Probursa 7% Banorte 7% Otras 16% Inbursa 6% Recent developments favoring derivatives innovation: more competitive equity market DERECHO & ECONOMÍA Accival 10%

  14. Scene for derivative innovations which are on the way in different markets DERECHO & ECONOMÍA • Fixed income securities • Interest rate swaps (28d vs up to 5 yrs) • Caps and floors • Foreign exchange • Currency swaps • Options, futures and forwards • Equity (?) • Credit (?) • Asigna: absortion of counterparty risk • Problem: • mostly interbank, lack of corporate risk policy

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